I try to learn more in depth about topics that interest me. I was reading about the Great Depression, but it is so hard to understand for me what exactly cause it, as I read it, it feels like a mix of fancy words that don’t tell me much (likely due to my lack of knowledge and english not being my 1st language). So, could anyone explain me in simple words what exactly cause the Great Depression?
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The United States emerged from WW1 as a growing economic power. A lot of places in Europe were damaged (both physically and in their labor force from the causalities of war), while the US had stayed out of the War basically until the last year but had rapidly increased the manufacturing industry during the lead up to entry. This set the stage for an absolutely massive economic expansion during the 20s as the recently expanded industrial base was turned towards consumer production from a wartime economy. Things were groovy. American factories were booming, the banking sector was making big loans to recovering nations and funding business expansion.
The stock market was doing great, anybody could make money off of it. It only seemed to go up! This caused a lot of speculative (i.e. reckless) behavior when it came to investing. People would take out loans to invest. People didn’t really realize it at the time, but it was a huge bubble.
In late 1929, the bubble popped. The easy money dried up. There were bank runs (this was before banks had insurance like they do now) and banks would become insolvent overnight. People lost their life savings if they had them stored in banks. Nobody wanted to spend money and the economy crashed to a halt. It became a vicious cycle – the less people were willing to spend money, the worse the economy became, and as the economy worsened, there was less money to go around. And remember how the US was loaning money to Europe to help with the war recovery? Yeah, that money dried up too. So now the issues were spreading outside of the US.
Nowadays the Federal Reserve would step in and inject money into the economy, but it didn’t. The Federal government also made big missteps by instating tariffs on goods going in and out of the economy – this made things even worse. So poor response this turned a bad recession into something even worse – the Great Depression.
Another issue is that all of the safety nets we now have in place (some of which the conservatives are trying to erase) did not exist then. There were no limits on margin buying in the stock market. There was no FDIC to protect depositors when a bank got in trouble, there were no social safety nets when people got in trouble. Add in the enormous imbalance in wealth distribution (like now) and you have a recipe for disaster. When the collapse began, conservatives in control did all the wrong things to stop it.
Simplest answer I have ever heard on this is that it takes money to make money. A healthy economy has a low but sustainable inflation rate around 2% or 3%, a growing GDP, a low interest rate, and a low unemployment rate as those are all major parts of people and companies borrowing money and expanding the economy.
Companies need to raise or borrow money to start their business or to expand. People also need to borrow money to purchase large items such as houses, vehicles, farm equipment, etc. In a recession, there is much less available money for any of these things and just like what happened at the start and the end of the COVID pandemic, some companies had made decisions that required them to borrow to expand or use much of their existing money for repairs, retooling, starting new lines of business, etc. Many of these decisions take years to finally provide a return on investment and a sudden shock to their planned income can be devastating.
If the money supply dries up, businesses go out of business or in the best case stop a lot of their production and lay off many of their employees just to avoid going out of business. Employees lost their jobs with no other companies hiring. This affected banks as well when the ability of their corporate and personal customers to have a sustainable income and qualify to borrow money stopped, and a lot of their customers had to withdraw some it all of their money, the banks went under. This snowball effect gets worse the longer it goes on.
It’s very simple: One day your income drops in half. How do you react? Well, if you’re anything like a normal person, you cut back on spending. You economize, skip non-essential purchases, and delay essential ones. For one person, that’s a perfectly sensible thing to do.
But what happens when **EVERYONE’S** income drops in half? Now everyone is cutting back on spending, skipping non-essential purchases, and delaying essential ones. The result? Businesses make less money, and they have to either cut staff, cut wages, or go bust. This causes more people to respond by economizing, and the next thing you know, the entire non-essential economy has more or less ground to a halt.
That’s what the Great Depression was. Everyone is broke at once because everyone stopped spending money. If you understand nothing else about economics, drill this into your head: *Economies are reciprocal*. My expenses are my income, and vice-versa.
No in particular, the consensus about the Great Depression was that it was made far worse by the Federal Reserve, who responded to the fall in spending by tightening credit, which exacerbated the crisis, making it harder for people who wanted to borrow money to spend it, and thus crank up the economic engine again.
People invest when they think the economy will do well – more customers that will buy things. Things were booming in the 1920s, so lots of investment. Stocks went up, more people started buying stocks as an investment just because “stocks always go up, so it’s easy money.” They even borrowed to invest. Then stocks fell. Instead of easy money, it was lost money. People who borrowed a lot were wiped out.
Normally, this just impacts the people speculating. But businesses in general worried about a downturn. Some banks loaned so much that they failed. Some banks failing led people to try and pull money out of their bank, which caused other banks to fail. Businesses saw banks failing and worried more, so laid people off and lowered production, as they expected a downturn. This caused more economic trouble, because unemployed people can’t buy things.
It created a cycle of things getting worse. “Deflation” happened, which meant things started getting cheaper. Good, right? No, actually bad – because then the best thing to do with your money is…not spend it. If a car costs $500 today but will cost $490 in a week, why not wait? If it costs $450 in a month…keep waiting. Don’t buy things. Sit on your money.
All that caused a cycle of business production to drop a lot, which caused layoffs, which caused more production to drop…
And it was fixed by getting things to stop dropping and turn around through spending money and getting people to expect that production will increase and costs will start to go up, so better to buy now. The government ordered big construction projects (and little ones) to help start spending, plus hired lots of people on public works jobs.
The economy was based on the average person buying lots of stuff. But the average person didn’t have lots of money to buy lots of stuff after some time. So banks gave them loans. After a few years banks crashed and people couldn’t buy stuff anymore due to not getting loans. Worse even: they had to pay the prior loans .
In the end people lost their jobs because factories couldn’t afford them because nobody bought their goods. Which led to less purchasing power, meaning less people could buy stuff, so factories lost even more revenue and had to fire even more people.
The ELI5 version:
In 1929, stockbrokers were overconfident — the markets were way, *way* up, and the extremely-optimistic outlook was that they’d stay that way for some time.
Because of that over-confidence, financial institutions started to do *a lot* of risky lending — granting loans, mortgages and other financial assistance to people that would ordinarily never qualify.
In the end, that came back to bite them — in 1930, the markets experienced a precipitous drop, which wiped out the value of all of those loans and mortgages.
Interest rates soared, to the point that the banks *lost* money when their customers couldn’t afford their mortgages or to pay interest on their loans.
People just…stopped paying.
Financial institutions had no choice but to foreclose on most of them, and then the banks had a whole *bunch* of real-estate on their hands that was realistically *never* going to sell in such a depressed market.
So, it was a combination of investor over-confidence, banks making risky loans, and rising interest rates that made *existing* loans unpayable.
Everybody has said it better than I could, but let’s not forget the extraordinary amount of money the US gave to a rebuilding Germany that they used to pay off war debts instead of fixing the country. That played a bigger role than most people realized.
One of the causes of the great depression that has not been mentioned is the collapse of farm prices in the 1920’s. 30 percent of the US. population lived on farms in the 1920’s. The great depression in rural America really started with the collapse of farm prices in 1920 – 1921. [https://www.ushistory.org/us/49c.asp](https://www.ushistory.org/us/49c.asp)
Typically, Americans really think the Great Depression was caused here in America. In actuality, it was rooted in the Treaty of Versailles, which ended the First World War while economically crushing Germany and other European countries. It was those debt defaults that ignited the defaults in the USA.
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